Humbert Summer School

August 24, 2009

I hope to give Joan Burton, Deputy Leader Of The Labour Party, speech coverage, same event, in a later post; more analysis of the NAMA legislative proposals in due course.

Extracts of Enda Kenny’s speech to the Humbert Summer School…My comments italicised on a per paragraph basis. Links to .pdf download of the following speech extracts here:

“If you want to understand what is wrong about NAMA, consider this headline from yesterday’s Irish Independent: “Bad bank to take over €3bn in US properties.” According to the Independent, almost one-third – one-third!- of all the bad loans to be transferred to NAMA are in the US and the UK. That equates to around €30 billion! Twice the size of our health budget!

Well worth our attention!

“In the 1940s the Marshall Plan rescued Europe’s economy through billions in grants and loans from the US Government. NAMA it now seems is a Marshall Plan in reverse. The taxes of Irish citizens will be used to shore up a massive spending spree by developers outside of Ireland. And this from a Government that lectures the rest of us on patriotism!

Can’t  fault this point. Its a transfer of  the wealth of the poor tax payer to the wealthy developers, who,  I’m sure  knew how to avoid tax and benefit from the tax incentives of our current government as they stoked the property bubble…

“We are constantly being told by the Government and its supporters that there is no alternative to NAMA. This is absolutely untrue. What is true, is that this Government has refused to consider any alternative. Instead, it is trying to soften up the public for a sweetheart deal for the banks. On Newstalk recently, the Taoiseach said: “The government has to write whatever cheques are necessary in the interest of maintaining financial stability”. I cannot think of a more irresponsible comment by a Taoiseach in recent times.

More excellent points here. Some alternatives given here: I’ll add one of my own at the end of this post.

“At its core, NAMA is a €90 billion “double or quits” gamble by Fianna Fáil on the property market. A €22,500 bet for every man, woman and child in this country.  But the recent High Court and Supreme Court cases have called the Government’s bluff. The courts asked for convincing evidence and argument that property prices in Ireland are only temporarily depressed. Of course, they didn’t receive it. Almost twenty years after the bursting of their own property bubble, Japanese property prices are still 50% below peak levels.

Indeed there would appear to be strong evidence that we are at the bottom of a 30 year cycle. Given that our property bubble was  a smoke and mirrors Ponsi type bubble fueled by unregulated lending, unregulated property/land speculation, unregulated banking and wild speculation, there is little evidence to suggest we will ever return to the crazy property pricing of recent years. FF I’m sure would have us believe otherwise, that, if we hold onto the assets long enough, good times will come again. This is akin to someone jumping into the sea tied to an anchor in the belief they will float to the top before they drown!

“Despite this, the banks are telling their investors and brokers that the “haircut” on loans transferred to NAMA will be no more than 20%. That’s a long way from the 50% write-down suggested by Green Party Chairman, Dan Boyle, last April.

The thorny question of the long term value of the loans..see last paragraphs below

“The whole NAMA gamble is fundamentally unfair and unwise. It transfers the responsibility for dealing with toxic loans from the banks who made them, and the investors who funded them, to the Irish taxpayer. Many professional investors that fuelled the crisis by recklessly giving tens of billions of Euros to the banks without proper due diligence, could walk away scot-free at the expense of taxpayers.

“For all of these reasons, Fine Gael cannot support NAMA. We will vote against the NAMA legislation when it comes before the Dáil next month. In its place, my party will offer our alternative solution. A solution which is better for our economy and safer for the taxpayer.

Yep, imho, the whole NAMA project amounts to a massive transfer of wealth from the poor tax payer to the rich developer/banker.

“Fine Gael’s proposals, which were first set out in February of this year, would be implemented in two steps:

Step 1: Fine Gael would immediately create a “Good Bank”, with a credit facility of up to €20 billion, to help get Ireland out of recession

“Small businesses throughout the country are literally dying because of a lack of credit, But the Government’s only response has been to publish the heads of a bill for NAMA.

“Our country is currently suffering from a vicious credit cycle. Money from the Irish Government and the ECB is flowing into the banks. But they are not lending because of the depth of the recession and their desire to strengthen their balance sheets. But this means that the economy gets worse. Which means that the banks are even more reluctant to lend.

“A Fine Gael Government would break this vicious cycle by creating a new, state-owned “Good Bank”, called the National Recovery Bank. By Good Bank we mean a bank that has no toxic assets on its balance sheet and, as a result, is able to lend to small businesses at reasonable rates.

“This Good Bank would initially have up to €20 billion in credit facilities. These facilities would be created by:

An initial Government injection into the Good Bank of €2 billion.
The sale of good loans to the ECB, which would provide the additional funding required.

“A Good Bank could be established very quickly. It would need about 50 staff with the right banking and legal qualifications, a Central Bank licence and access to ECB liquidity operations. The Good Bank would not have its own retail network. Instead, it would subcontract the existing banks to run its loan book.

“This is not a new idea. Variations of our proposal are already working in other European countries, including France and Denmark, funded by the ECB. So the question must be asked: Why isn’t the Government establishing a Good Bank right now?

I would imagine there are enough local and foreign banks in Ireland to serve the Irish market. Given that the existing banks below are to be fixed, why waste  resources in trying to set up a new bank when those resources could be better spent in fixing banks that when fixed we presume will be able to provide the services that ought to be provided by a ‘good bank’.

We need to fix the regulatory system as well. Most importantly bankers and developers need to be questioned before the Public Accounts Committee of the Oireachtas so that we may apportion blame where its due. We might also spend our energy in having a referendum on the NAMA proposals on the same day as the Lisbon Treaty!

“Step 2: The existing banks would be restructured to place the risk with the shareholders and the bondholders

“The current Bank Guarantee ends in September 2010. A Fine Gael Government would give the existing banks until that date to strengthen their balance sheets. The banks can do this in a number of ways: By selling good loans, working out some of their bad loans, disposing of non-core assets, etc. However, the key will be for the banks to reduce their own debt through re-negotiation with their bondholders.

“In September 2010, new stress tests will be carried out on the banks by the Regulator. If individual banks have made good progress, and it is clear that the bondholders have taken a real hit, the Government may inject additional monies into the banks to help them return to full financial health.

Absolutely not, I don’t agree any free financial dig outs should be given to the banks. Banks should be let fail if they are unviable. If they can be saved i.e. made viable, then the government should get an equity stake, according to international best practice, in return for any investment in the banks. Or provide loans to the banks at a good rate of return to the tax payer!

“If individual banks have failed to make real progress, particularly in their negotiations with the bondholders, a Fine Gael Government would then nationalise them. Under new legislation, we would remove the bad assets from these banks and place them in a completely separate property management company. This would not be owned by the taxpayers, like NAMA, but by existing investors and bondholder. The banks, freed of their bad assets and the claims of their bondholders, would then trade as normal, with little or no impact on their retail customers or employees.

I agree with nationalising banks that can be saved and are worth saving. But I’m not clear what Fine Gael propose here. On the one hand, the banks are nationalised. On the other, the bad assets would be taken from the banks and put into a separate property management company that would be owned by existing investors and bond holder.  Would this be legally and constitutionally possible?

This would amount to nationalising the  assets of a bank and then  taking the bad assets the state now owns and saying, hey guys, we don’t want this bad stuff.  We are going to give this toxic debt back to you now!

If I was a developer, wouldn’t I say, no thanks!! AND, just to make sure you don’t pursue me on this, I’m going to declare myself bankrupt! For me, Fine Gael need to do a lot more spelling out of this proposal!

Another problem with this approach is that Fine Gael avoid the big question of the value to be given to bad assets/toxic debt. This needs to be addressed!

“The big mystery is why Fianna Fáil has not adopted this approach. I believe one of the reasons is that they are fearful of how the bond markets will respond. I have no doubt that individual bank bondholders have informed the Government that if it tries to make them share the pain, the Government will find it harder to raise sovereign debt in the future. My advice to the Government is simple. Don’t be swayed by the arguments of individual bondholders. If the Government moves resolutely on the banks, and implements Fine Gael’s proposals, the bond markets as a whole will applaud. And the Government will have the full support of my party.

“As we approach the Dáil debate on NAMA, my message to Brian Cowen is this: Now is a time for courage. For steadiness under fire. For real patriotism. If you can’t or won’t stand up for the people of this Republic, it is time for you to go.”

As I explore more into the whole NAMA issue, the leading question of the value put on impaired loans/toxic assets comes more and more to the fore. This is the pivot of the problems faced by NAMA. The tax payer or indeed any stakeholder including the government, developers, bond holders, shareholders, need to address this important question.

In my opinion, the risk attached to getting this question wrong is too great a risk for the tax payer. The answer is to avoid that risk at all costs. The only way to do that is to have an immediate firesale of the assets.

We are in a better position than other countries whose toxic debt is hidden in financial instruments such as futures, hedge funds, and complex derivatives whose value is nearly impossible to assess.

Our toxic debt is linked to property which has a real time value. There is pain involved in a write down such as a fire sale. The government would still need NAMA to oversee this fire sale.

The issue of government bonds and the raising of  loans to help our economy weather the worst of  this storm would be money much better spent than what is envisaged. Fire can have a cleansing and a renewal effect. Property prices will achieve a real value without ballooning through NAMA. Property will move to where it ought to be i.e. in the market place, not withheld from the market place to prop up speculation.

We need a short term solution to make us competitive again, a fire sale of toxic assets could do this. Commercial and home property prices at home would come down. Perhaps down to realistic levels affordable by business and future home owners.

The firing should include those responsble for creating this mess.

Next post, pp34-75, NAMA proposed legislation




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